Regulators to blame in part for SVB, Signature Bank failures, federal watchdog says

Regulators failed to address serious mismanagement at two major U.S. banks, leading to two of the biggest bank failures in U.S. history, a report by the Government Accountability Office (GAO) released Friday found.

The failures of Silicon Valley Bank (SVB) and Signature Bank in March sent shockwaves throughout the U.S. economy and likely hastened the arrival of a potential recession, which the Fed has been warning about since last month.

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While lawmakers have been pointing fingers at both bank managers and regulators the GAO report confirms that the Federal Reserve was at least partly to blame.

While working as CEO of SVB, Greg Becker also sat on the board of the San Francisco Fed whose job it was to make sure his bank was following rules and acting responsibly. The GAO revealed Friday that the Fed began working on an enforcement action to address mismanagement at SVB, but failed to complete it before the bank failed.

“In the five years prior to 2023, regulators identified concerns with Silicon Valley Bank and Signature Bank, but both banks were slow to mitigate the problems the regulators identified and regulators did not escalate supervisory actions in time to prevent the failures,” the GAO report found.

“The Federal Reserve Bank of San Francisco rated Silicon Valley Bank as satisfactory up until the bank received its first large bank rating in 2022. The Reserve Bank downgraded Silicon Valley Bank in June 2022 and began working on an enforcement action in August 2022. However, it did not finalize the action before the bank failed,” the agency said.

The Federal Deposit Insurance Corporation (FDIC) bailed out depositors at SVB well above the standard $250,000 insurance limit, in some cases into the billions of dollars.

The bank served a niche clientele of wealthy venture capitalists (VCs) that was described by Treasury Secretary Janet Yellen as “highly correlated.”

“The Federal Deposit Insurance Corporation (FDIC) took multiple actions to address supervisory concerns related to Signature Bank’s liquidity and management, but did not substantially downgrade the bank until the day before it failed,” the GAO reported on Friday.

The report comes just as the Fed performed its own post-mortem on the failure of SVB, in which regulators also blamed themselves for falling asleep at the wheel.

Mea culpa: Fed blames oversight, management for Silicon Valley Bank collapse

“Federal Reserve supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity,” Fed regulators said, adding that “when supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough.”

Consultants for the banking industry have told The Hill that the industry is being much more responsive to federal regulators in terms of data collection following the bank collapses that could now be having an impact upon the physical economy beyond the financial sector.

But the latest findings from both the Fed and the GAO could prompt a legislative response in addition to a regulatory one.

Sen. Tim Kaine (D-Va.) told The Hill at the end of March that he thought there could be cause for a banking reform bill this year.

“If we did one banking bill this year, we’ll only do one,” he said. “Most of us are like, ‘Let’s get the report.”

In March the Fed warned that historical recessions stemming from the financial sector are often worse than typical recessions resulting from characteristic business cycle dynamics.